CA Expands Its Roster

Computer Associates announces its ninth acquisition in 15 months.
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Computer Associates

(CA) - Get Report

kept its acquisition chops sharp with its purchase Thursday of privately held Wily Technology for $375 million in cash -- its ninth takeover in a $1.5 billion acquisition campaign that began 15 months ago.

The takeover of the Brisbane, Calif., software maker will move CA into a fast-growing "adjacent market," application management, and should contribute about $72 million in revenue in fiscal 2007, said CA CEO John Swainson.

Wily's estimated revenue in 2005 was $53 million, a year-over increase of 75%, said Wily CEO Dick Williams, who will join CA along with most of the company's 260 employees.

Although there was some surprise that Wily chose to be acquired and not proceed with earlier plans to go public, Williams said that delivering the kind of growth needed to support an independent public company was prohibitively expensive. His sales force, for example, is very small -- about 33 executives -- and expanding it sufficiently could have cost some $100 million.

"Our problem wasn't competition, it was funding new opportunities," he said.

In an interview, Swainson said he intends to continue making acquisitions, and added that CA's growth will be driven by organic expansion and takeovers in roughly equal measure.

Since becoming CEO, Swainson has sharpened CA's focus, concentrating on enterprise security and enterprise systems management. As part of that process, CA sold off its Ingres database business late last year.

Unlike

Oracle

(ORCL) - Get Report

, which has made blockbuster acquisitions of companies like PeopleSoft and

Siebel Systems

(SEBL)

for billions of dollars each, CA's buys have been more technologically oriented and a lot smaller, all well below $400 million net cash.

Like Oracle CEO Larry Ellison, Swainson believes that consolidation of the software sector will inevitably continue and that large companies must strive to be No. 1, or at least a strong No. 2 in every market they serve. "That's our goal; we have to grow or die."

Swainson also has worked to move beyond the company's troubled past by instituting strong internal controls, the lack of which led to a $2.2 billion accounting scandal, hiring new management and reorganizing the company along product lines. Last year, he changed the company's name from Computer Associates, to CA, to symbolize the break with the past.

In the second quarter, the mainframe and systems software giant swung to a second-quarter profit from a big loss a year ago and surprised Wall Street with a nearly doubled cash flow from operations.

However, investors are still not convinced the company is back on track; the stock lost about 8% of its value in 2005.

Investors didn't pay much attention to the acquisition -- in recent trading shares were off 8 cents to $28.24 on average volume -- although initial analyst reaction was positive.

Gregg Moskowitz of the Susquehanna Financial Group called the deal "highly logical" and said, "Wily was easily the most desirable private company in this growing segment."

Good news for Wily's venture-capital backers was bad news for investors in troubled

Mercury Interactive

(MERQ)

, recently delisted by

Nasdaq

amidst its own scandal. Mercury, noted Moskowitz and other analysts, would have been a good fit within CA. Instead, CA will become a strong competitor to its applications management business. (Susquehanna does not have an investment banking relationship with CA.)

Interestingly, analyst Trip Chowdhry of FTN Midwest Securities says the deal gave

BEA Systems

(BEAS)

a boost on Wall Street Thursday. That's because BEA was an early investor in Wily and probably earned a 10-fold return on its money, said Chowdhry, who also praised the acquisition. (His company does not have an investment banking relationship with CA.)

In recent trading, shares of BEA were up 46 cents, or 4.8%, to $9.98.